Weekly Market Update

For the third consecutive meeting, the Federal Reserve raised interest rates seventy-five basis points (0.75%), but while the S&P 500 rallied 10% in just three weeks following the prior Fed meeting in July, this week’s Fed decision had a distinctly opposite outcome. Investors widely anticipated a 75 bps hike, but markets were clearly caught off guard by the Fed’s updated rate hike guidance, also known as the dot plot, which indicated median interest rate expectations of 4.4% by the end of 2022, implying another 125 bps of hikes over the final two meetings of the year. In addition, the Fed was far from alone in raising rates this week as central banks around the world cumulatively hiked by nearly 650 bps. As a result, interest rates have surged to levels not seen in over a decade with the average rate on a fixed 30-year mortgage eclipsing 7% and the 2-year US Treasury yield surging from about 3.30% to 4.20% in just one month, its highest levels since October 2007. The Fed has already hiked rates by the most since the six months ending in March 1981 (see chart below) and with interest rates showing few signs of slowing down, investors’ concerns of a policy mistake surged and stocks finished the week near the S&P 500’s lowest levels of the year.

With the Fed increasingly intent on confronting inflation regardless of the economic consequences, once again the old adage to sell Rosh Hashanah and buy Yom Kippur has proven prophetic. In the near-term it is impossible to fight the Fed, as seasonal weakness and a looming corporate share buyback blackout period ahead of the third-quarter earnings season loom large. However, we want to highlight that while the Fed’s rate hike guidance was concerning, their track record for forecasting rate hikes is abysmal and over the next few months much of the market movement will rely on handicapping the true probabilities of more aggressive hikes. For example, the Fed has now hiked 300 bps in 2022; twelve months ago, the Fed was predicting a single 25 bps hike. The Fed insists that it is data-dependent, but we suspect that they are really only watching the personal consumption expenditures (PCE) and consumer price index (CPI) reports that will arrive on September 30th and October 13th. Stocks enter next week very oversold and we are circling the Case-Shiller home price index, final reading for Q2 GDP, and PCE reports for any signs of slowing inflation that might allow stocks to rally.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder